It is astonishing how many over-bonused bankers hadn’t understood the message on the tin.
The Rating Agencies, S&P and Moody’s to the fore, have come in for a lot of stick over the failure of their ratings not to spot the CDO toxic bonds fallibility, many of which were rated AAA, that have just about destroyed the world’s credit systems and induced a global depression.
Surprisingly, a lot of this criticism is actually misplaced: when using any product, it’s best to read and take advice on what it says on the tin, before misuse and registration of a complaint.
A Triple-AAA rating only ever meant one thing: at the expiry of this credit you will most likely get your money back, with interest. How could anyone apply any other criteria, way out into the future?
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Take an AAA thirty-year bond issued by a country or a corporate for example: the Rating Agency is saying that the issuer or any successor will be around in 30 years time and you will most probably be paid in full, with interest.
So the UK and EU countries are currently rated AAA, but it is no means certain that Spain and Italy will stay this way, and Ireland has already been down-rated and a question mark is now hanging over Greece and Spain. And the UK may well come up for review.
With a downgrade, investors are alerted and on traded debt the interest payable rises as the bond’s value decreases. BA’s debt, for example, has just been downgraded to junk status.
A Triple-AAA rating applies only to the debt instrument in its barest sense. It did not say that if you leveraged this bond, or sliced and diced it on Wall Street, and then sold bits of it off, so that it ended up as toast stuck in the gullet of a Swiss banker yodelling up some cow-herd valley, that the AAA rating applied to these much changed circumstances.
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UBS in particular accepted anything served up as long as it was triple-AAA rated in the fond belief that it couldn’t therefore go wrong. The Rating Agencies never said you couldn’t lose money in valuation terms between year 1 and 30, it only said that in year 30 that you will collect on the original debt.
If in between times you leveraged up and a global downturn came along and you had to sell, well that’s down to you. And the purchaser of this distressed debt will collect in the future in all probability, but just as long as he doesn’t foul up with his own finances too, just as the Rating Agency reckoned.
It is astonishing how many over-paid and over-bonused bankers hadn’t read and hadn’t understood the message on the tin.
Nevertheless, the Rating Agencies have been pushed to consider new business models to deflect the criticism. Moody’s, for example, has now prepared a list of the companies most likely to default in the future and there are over 10,000 names on the forthcoming list, of which 20% are reckoned to default soon.
It’s a fairly predictable list of leading players of what’s left of the auto, casino, airline, retail and financial companies and other laggards, which any bonus-worthy banker could work out for himself by reading the last accounts and quarterly results, or even the newspapers.
Whether it is wise for the Rating Agencies to peer into the future in this way will soon be tested: first, companies put on the list will generally find it doesn’t make life any easier, and those that don’t default will complain. And if a company not on the list does default will provoke similar criticism from a different corner.
Entering this ‘Damned if they do and damned if they don’t’ killing zone may be a step too far. What the Rating Agencies should have done first was to tell the market what was, and what wasn’t, on the tin in the first place.
